The Pakistan Credit Rating Agency Limited

Rating Report
Report Contents
1. Rating Analysis
K.K. Rice Mills (Pvt.) Limited 2. Financial Information
3. Rating Scale
4. Regulatory and Supplementary Disclosure

Rating History
Dissemination Date Long Term Rating Short Term Rating Outlook Action Rating Watch
19-Feb-2021 BBB A2 Stable Maintain -
19-Feb-2020 BBB A2 Stable Upgrade -
20-Aug-2019 BB+ A3 Stable Maintain -
01-Mar-2019 BB+ A3 Stable Upgrade -
27-Dec-2018 BB B Stable Maintain -
28-Jun-2018 BB B Stable Maintain -
08-Jan-2018 BB B Stable Initial -

Rating Rationale and Key Rating Drivers

Rice is among the five major crops of Pakistan and is the second main staple food, after wheat. Both basmati (long, thin and
aromatic rice) and non-basmati (long grain white rice - IRRI 6 and IRRI 9) rice are cultivated in Punjab and Sindh, respectively.
During FY20, rice production grew by ~3%, standing at ~7.4mln MT (FY19: ~7.2mln MT). Out of this, ~4.3mln MT of rice is
exported to generate ~PKR 320bln of export revenue. Exports constitute of ~82% non-basmati and ~18% basmati rice. Local
consumption includes ~95% of basmati rice and ~5% non-basmati. During 2QFY21, rice exports deteriorated to ~PKR
41bln(USD 248mln) (2QFY20: ~PKR 53bln) (USD 333mln) owing to higher prices at the mill-gate and shortage of exportable
non-basmati rice. Post Jul-20, IRRI exports remained stable due to stable demand from African regions - being a necessity grade
rice.
The ratings incorporate K.K Rice Mills strong presence in the rice exporting market with a sizable business volume. K.K Rice
Mills strategizes on adopting a top-line centric approach mainly targeting the Middle East and African region to explore growth
avenues. Competitiveness in the international market in terms of pricing and branding remain a key challenge for the rice
exporters in FY20. The Company's growth centric strategy encompasses maximizing returns through expansion; which
comprises addition of a new plant which became operational by the end of 1QCY21. The ratings derive comfort from the
progress in financial performance as indicated in better margins trajectory over the periods. Sponsor's invested efforts are
reflected in the development of a corporate culture through enhanced business practices & clarity on the succession to the next
generations.

The ratings are dependent upon sustained business volumes and growing profitability margins. Meanwhile, rationalizing short-
term borrowings and adherence to sound financial discipline remains imperative for ratings. Strengthening governance structure
will benefit the ratings.

Disclosure
Name of Rated Entity K.K. Rice Mills (Pvt.) Limited
Type of Relationship Solicited
Purpose of the Rating Entity Rating
Applicable Criteria Methodology | Corporate Ratings(Jun-20),Methodology | Correlation Between Long-Term And Short-
Term Rating Scale(Jun-20),Criteria | Rating Modifier(Jun-20)
Related Research Sector Study | Rice(Nov-20)
Rating Analysts Faiqa Qamar | [email protected] | +92-42-35869504

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 Rice
The Pakistan Credit Rating Agency Limited
Profile

Legal Structure KK Rice Mills (Pvt.) Ltd. ('KK Rice' or 'the Company') was incorporated as a private limited company in 2009.
Background The Sponsors were in commodity trading business for three decades, formally named as Meskay & Femtee (Pvt.) Ltd. In 2005, the Sponsors decided to
separate their businesses. In 2006, KK Rice Commodities was setup by Mr Chela Ram as a sole proprietorship concern. In 2009, the Company was registered as a private
limited company and was renamed as KK Rice (Pvt.) Ltd. The Company received the license to export from Rice Export Association (REAP) in Sept-09.
Operations The Company is primarily involved in the business of exporting non-basmati rice. KK Rice has two rice processing plants located at two different locations,
Port Qasim and Nooriabad. The combined production capacity of the plants stands at 56 MT per hour. During FY20, the capacity utilization remained stable and stood at
35% (FY19: 35%). Lately, the Company has installed new plant at Nooriabad which become operational after Jun-20. The production capacity has increased to 100
MT/hour. The Company’s registered office is situated at Beamount Road, Karachi.
Ownership

Ownership Structure The Company’s major ownership resides with Mr. Chela Ram (55%). The remaining stake resides with his wife, Mrs. Khami Bai (20%), nephew,
Mr. Dileep Kumar (20%), and son Mr. Jatindar Kumar (5%).
Stability The Company is completely owned by the sponsoring family. Although, no formal succession plan exists, second generation has been gradually inducted in the
family business.
Business Acumen Mr. Chela Ram, the Company's CEO and founder, is an experienced professional. He was the Chairman of Pakistan Hindu Council from 2014-2016
and has also served as the Senior Vice Chairman of Rice Export Association of Pakistan (REAP). Mr. Chela Ram comes from an entrepreneurial background and has been
in commodity trading since last three generations. His family is well known veterans in trading of rice, wheat and sugar.
Financial Strength The Sponsors of the Company have adequate net-worth to support the business. Furthermore, as of FY20, the Company has an asset base of ~PKR
5.4bln, supported by an equity base of ~PKR 1.1bln.
Governance

Board Structure The Company’s BoD comprises three Executive Directors and one non-Executive Director. All four directors are from the Sponsoring family.
Members’ Profile Mr. Chela Ram, CEO of the Company, is an experienced professional. He was the Chairman of Pakistan Hindu Council from 2014-2016. He has also
served as the Senior Vice Chairman of Rice Export Association of Pakistan.
Board Effectiveness There are no Board Committees in place at KK Rice. In FY20, two BoD meetings were held. The attendance remained short. Minutes of the
meetings are adequately kept. The governance frame work needs improvement, as the director and shareholders are engaged in the management of the Company.
Financial Transparency A.M Laliawala & Co. Chartered Accountants are the auditors for the Company. The firm is QCR rated but not on the SBP’s panel of auditors.
The auditors issued an unqualified opinion on the Company’s financial statements for the year ended Jun-20.
Management

Organizational Structure The organizational structure has been optimized as per the operational needs. The Company operates through three functions: Export, Finance,
Admin and HR. All functional managers’ report to the Company’s CEO. The CEO makes all pertinent decisions of the Group. As the Company’s CEO is responsible for
the whole unit, thus highlighting the key man risk of management.
Management Team Mr. Chela Ram, CEO of the Company, is assisted by a team of experienced professionals. Mr. Dileep Kumar has been overseeing the affairs of the
Company for the past 12 years. Mr. Anil Kumar, Director Finance, manages the Company's finances.
Effectiveness There are no management committees in place and the management meets informally to discuss pertinent matters.
MIS The Company uses a customized software as per its needs, installed by Sidat Hyder. Reports are generated as per requirements.
Control Environment The Company has established an internal audit function to implement policies and procedures.
Business Risk

Industry Dynamics Rice is among the five major crops of Pakistan and is the second main staple food, after wheat. Both basmati (long, thin and aromatic rice) and non-
basmati (long grain white rice - IRRI 6 and IRRI 9) rice are cultivated in Punjab and Sindh, respectively. During FY20, rice production grew by ~3%, standing at ~7.4mln
MT (FY19: ~7.2mln MT). Out of this, ~4.3mln MT of rice is exported to generate ~PKR 320bln of export revenue. Exports constitute of ~82% non-basmati and ~18%
basmati rice. Local consumption includes ~95% of basmati rice and ~5% non-basmati. During 2QFY21, rice exports deteriorated to ~PKR 41bln(USD 248mln) (2QFY20:
~PKR 53bln) (USD 333mln) owing to higher prices at the mill-gate and shortage of exportable non-basmati rice. Post Jul-20, IRRI exports remained stable due to stable
demand from African regions - being a necessity grade rice.
Relative Position The Company has a small market share of ~2% in terms of revenue and ~2.3% in terms of production in the rice industry of the country.
Revenues The Company mainly generates revenue by exporting non-basmati Rice (99%). The Company’s top 10 export regions generate around ~ 77% revenue for the
Company. The remaining ~23% is exported to the Middle-East and Europe. During FY20, the Company posted a topline of PKR 9.5bln, seeing a growth of 10% (FY19:
PKR 8.6bln) attributable to the increase in the price of rice per ton by ~10% during FY20. During 2QFY21, the Company generated a topline of PKR 5.2bln, up by 67%
from the same period during FY20, owing to the hike in prices of rice after easing of lockdown restrictions and the increase in the production capacity.
Margins The gross margin of the Company during FY20 dipped slightly to 13.4% (FY19: 13.8%) as a result of increased raw material costs. On operational levels, the
margin remained unchanged at 6%. On net level, the margin posted a dip to 3.3% (FY19: 4.8%).The bottom-line decreased to PKR 317mln during FY20 (FY19: PKR
415mln) as a result of exchange loss of PKR 40mln. During 2QFY21, gross margin stood at 11.9%, operating margin stood at 6.9% and net profit margin stood at 3.6%.
However, going forward the margins are expected to improve as a result of increasing production capacity, increasing demand, and decreased financing costs. The bottom-
line closed at PKR 191mln during 2QCY21.
Sustainability The Company is planning to diversify its revenue stream by adding Basmati rice exports to its list.
Financial Risk

Working Capital The Company’s inventory days increased to 129 days in FY20 (FY19: 108 days). The Company’s receivables and payables stood at 39 days and 43
days during FY20, respectively. Similarly, net working capital days also increased to 126 days. During 2QCY21, inventory days stood at 130 days, receivables’ and
payables’ days remained stable at 39 days and 43 days, respectively. As of 2QCY21, the Company has limited room to borrow against trade assets and total assets.
Coverages Interest cover is a function of free cash flows and finance cost. The free cash flows of the Company stood at PKR 375mln in FY20 (FY19: PKR 772mln). In
FY20, finance cost increased to PKR 165mln due to higher interest rate (FY19: PKR 157mln). Similarly, interest cover deteriorated to 3.1x in FY20 (FY19: 9.6x) and
core and total interest cover stood at 2.6x each in FY20. Moreover, debt payback stood at (0.6) days in FY20. During 2QCY21, free cash flows of the Company were PKR
279mln and finance costs stood at PKR 67mln. Interest cover stood at 6.4x, while, both interest and total cover stood at 5.7x.
Capitalization The Company has highly leveraged capital structure with debt-to-equity ratio at 72% (FY19: 81%). The total debt of the company decreased to PKR
2.8bln in FY20 (FY19: PKR 3.5bln) as a result of payment of long-term borrowings leading to lower leveraging. As of 2QCY21, leveraging stands at ~74%.

K.K. Rice Mills (Pvt.) Limited Feb-21

Rating Report www.PACRA.com
 0 0 0 0 0 Financial Summary 0
0 0 0 0 0 PKR mln 0
Financial Summary
The Pakistan Credit Rating Agency Limited PKR mln
K.K Rice Mills (Private) Limited Dec-20 Jun-20 Dec-19 Jun-19 Dec-18 Jun-18 Jun-17
Rice 6M 12M 6M 12M 6M 12M 12M

A BALANCE SHEET
1 Non-Current Assets 836 817 812 690 844 647 356
2 Investments - - - - - - -
3 Related Party Exposure - - - - - 3 -
4 Current Assets 5,962 4,606 4,162 5,160 3,348 2,391 1,514
a Inventories 4,209 3,244 3,208 3,501 2,088 1,622 917
b Trade Receivables 1,497 990 492 1,066 1,173 517 271
5 Total Assets 6,799 5,422 4,974 5,850 4,191 3,041 1,871
6 Current Liabilities 1,625 1,337 932 1,551 254 518 291
a Trade Payables 1,288 938 476 1,292 145 343 167
7 Borrowings 3,789 2,868 3,055 3,492 3,246 2,213 1,290
8 Related Party Exposure 63 81 - - - - -
9 Non-Current Liabilities - - - 0 - - -
10 Net Assets 1,322 1,136 988 806 691 310 289
11 Shareholders' Equity 1,322 1,136 988 806 691 310 289

B INCOME STATEMENT
1 Sales 5,238 9,543 3,872 8,646 3,114 7,244 5,190
a Cost of Good Sold (4,616) (8,267) (3,150) (7,449) (2,701) (6,677) (4,775)
2 Gross Profit 622 1,276 723 1,197 413 566 415
a Operating Expenses (259) (716) (378) (696) (186) (379) (291)
3 Operating Profit 363 560 345 501 227 187 124
a Non Operating Income or (Expense) (57) 21 (24) 152 (7) (11) (8)
4 Profit or (Loss) before Interest and Tax 306 581 321 653 220 176 116
a Total Finance Cost (67) (165) (97) (157) (41) (71) (42)
b Taxation (48) (99) (43) (82) (25) (70) (51)
6 Net Income Or (Loss) 191 317 181 415 154 34 22

C CASH FLOW STATEMENT

a Free Cash Flows from Operations (FCFO) 279 592 305 772 215 125 91
b Net Cash from Operating Activities before Working Capital Changes 212 371 195 622 215 60 44
c Changes in Working Capital (1,147) 350 323 (1,910) (1,267) (728) (88)
1 Net Cash provided by Operating Activities (935) 721 518 (1,288) (1,052) (668) (43)
2 Net Cash (Used in) or Available From Investing Activities (89) (130) (130) (68) (205) (315) (123)
3 Net Cash (Used in) or Available From Financing Activities 899 (433) (438) 1,244 1,160 922 318
4 Net Cash generated or (Used) during the period (125) 158 (49) (111) (97) (60) 151

D RATIO ANALYSIS
1 Performance
a Sales Growth (for the period) 9.8% 10.4% -10.4% 19.4% -14.0% 39.6% -17.3%
b Gross Profit Margin 11.9% 13.4% 18.7% 13.8% 13.2% 7.8% 8.0%
c Net Profit Margin 3.6% 3.3% 4.7% 4.8% 5.0% 0.5% 0.4%
d Cash Conversion Efficiency (FCFO adjusted for Working Capital/Sales) -16.6% 9.9% 16.2% -13.2% -33.8% -8.3% 0.1%
e Return on Equity [ Net Profit Margin * Asset Turnover * (Total Assets/Sh 32.1% 26.9% 33.7% 67.7% 51.8% 13.8% 8.8%
2 Working Capital Management
a Gross Working Capital (Average Days) 173 168 195 142 158 84 78
b Net Working Capital (Average Days) 134 126 153 107 144 71 71
c Current Ratio (Current Assets / Current Liabilities) 3.7 3.4 4.5 3.3 13.2 4.6 5.2
3 Coverages
a EBITDA / Finance Cost 8.2 5.4 4.9 10.6 9.7 4.7 5.4
b FCFO / Finance Cost+CMLTB+Excess STB 5.7 4.1 3.6 7.7 9.0 0.4 3.3
c Debt Payback (Total Borrowings+Excess STB) / (FCFO-Finance Cost) 0.3 0.3 0.3 0.2 0.4 4.1 1.3
4 Capital Structure
a Total Borrowings / (Total Borrowings+Shareholders' Equity) 74.4% 72.2% 75.6% 81.2% 82.5% 87.7% 81.7%
b Interest or Markup Payable (Days) 61.5 38.8 0.0 0.0 0.0 0.0 0.0
c Entity Average Borrowing Rate 2.7% 3.9% 4.3% 2.7% 1.7% 2.4% 2.3%
 Scale – Credit Rating

Credit Rating
Credit rating reflects forward-looking opinion on credit worthiness of underlying entity or instrument; more specifically it covers relative ability to honor
financial obligations. The primary factor being captured on the rating scale is relative likelihood of default.

Long-term Rating Short-term Rating

Scale Definition Scale Definition
A1+ The highest capacity for timely repayment.
Highest credit quality. Lowest expectation of credit risk. Indicate exceptionally strong
AAA A strong capacity for timely
capacity for timely payment of financial commitments A1
repayment.
AA+ A satisfactory capacity for timely
Very high credit quality. Very low expectation of credit risk. Indicate very strong repayment. This may be susceptible to
AA A2
capacity for timely payment of financial commitments. This capacity is not significantly adverse changes in business,
vulnerable to foreseeable events. economic, or financial conditions.
AA- An adequate capacity for timely repayment.
A3 Such capacity is susceptible to adverse
A+ changes in business, economic, or financial
High credit quality. Low expectation of credit risk. The capacity for timely payment of The capacity for timely repayment is more
A financial commitments is considered strong. This capacity may, nevertheless, be susceptible to adverse changes in business,
vulnerable to changes in circumstances or in economic conditions. A4
economic, or financial conditions. Liquidity
A- may not be sufficient.
BBB+ Short-term Rating
Good credit quality. Currently a low expectation of credit risk. The capacity for timely A1+ A1 A2 A3 A4
BBB payment of financial commitments is considered adequate, but adverse changes in AAA
circumstances and in economic conditions are more likely to impair this capacity. AA+
BBB- AA
BB+ AA-
Moderate risk. Possibility of credit risk developing. There is a possibility of credit risk
A+
developing, particularly as a result of adverse economic or business changes over time;
BB A
however, business or financial alternatives may be available to allow financial

Long-term Rating
commitments to be met. A-
BB- BBB+
B+ BBB
High credit risk. A limited margin of safety remains against credit risk. Financial BBB-
B commitments are currently being met; however, capacity for continued payment is BB+
contingent upon a sustained, favorable business and economic environment. BB
B- BB-
CCC B+
Very high credit risk. Substantial credit risk “CCC” Default is a real possibility.
B
Capacity for meeting financial commitments is solely reliant upon sustained, favorable
CC B-
business or economic developments. “CC” Rating indicates that default of some kind
appears probable. “C” Ratings signal imminent default. CCC
C CC
C
D Obligations are currently in default. *The correlation shown is indicative and, in certain
cases, may not hold.

Outlook (Stable, Positive, Rating Watch Alerts to the Suspension It is not Withdrawn A rating is Harmonization A
Negative, Developing) Indicates possibility of a rating change possible to update an withdrawn on a) change in rating due to
the potential and direction of a subsequent to, or, in opinion due to lack termination of rating revision in applicable
rating over the intermediate term in anticipation of some material of requisite mandate, b) the debt methodology or
response to trends in economic identifiable event with information. Opinion instrument is underlying scale.
and/or fundamental indeterminable rating should be resumed in redeemed, c) the rating
business/financial conditions. It is implications. But it does not foreseeable future. remains suspended for
not necessarily a precursor to a mean that a rating change is However, if this six months, d) the
rating change. ‘Stable’ outlook inevitable. A watch should be does not happen entity/issuer defaults.,
means a rating is not likely to resolved within foreseeable within six (6) or/and e) PACRA finds
change. ‘Positive’ means it may be future, but may continue if months, the rating it impractical to surveill
raised. ‘Negative’ means it may be underlying circumstances are should be considered the opinion due to lack
lowered. Where the trends have not settled. Rating watch may withdrawn. of requisite
conflicting elements, the outlook accompany rating outlook of information.
may be described as ‘Developing’. the respective opinion.

Surveillance. Surveillance on a publicly disseminated rating opinion is carried out on an ongoing basis till it is formally suspended or withdrawn. A
comprehensive surveillance of rating opinion is carried out at least once every six months. However, a rating opinion may be reviewed in the
intervening period if it is necessitated by any material happening.

Note. This scale is applicable to the following methodology(s): Entities Instruments

a) Broker Entity Rating a) Basel III Compliant Debt Instrument Rating
b) Corporate Rating b) Debt Instrument Rating
c) Financial Institution Rating c) Sukuk Rating
d) Holding Company Rating
e) Independent Power Producer Rating
f) Microfinance Institution Rating
g) Non-Banking Finance Companies
(NBFCs) Rating

Disclaimer: PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be
reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting
from any error in such information. Contents of PACRA documents may be used, with due care and in the right context, with credit to PACRA.
Our reports and ratings constitute opinions, not recommendations to buy or to sell.

The Pakistan Credit Rating Agency Limited June 2020

 Regulatory and Supplementary Disclosure
(Credit Rating Companies Regulations,2016)

Rating Team Statements

(1) Rating is just an opinion about the creditworthiness of the entity and does not constitute recommendation to buy, hold or sell any security of the
entity rated or to buy, hold or sell the security rated, as the case may be | Chapter III; 14-3-(x)

2) Conflict of Interest
i. The Rating Team or any of their family members have no interest in this rating | Chapter III; 12-2-(j)
ii. PACRA, the analysts involved in the rating process and members of its rating committee, and their family members, do not have any conflict of
interest relating to the rating done by them | Chapter III; 12-2-(e) & (k)
iii. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)] Explanation: for the purpose of above clause,
the term “family members” shall include only those family members who are dependent on the analyst and members of the rating committee

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(5) PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of entity subject to
rating | Chapter III; 10-7-(k)

Conduct of Business
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(12) PACRA receives compensation from the entity being rated or any third party for the rating services it offers. The receipt of this compensation has
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Reference Chapter III; 12-2-(f)
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Chapter III | 18-(a)
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(21) PACRA engages with the issuer and the debt securities trustee, to remain updated on all information pertaining to the rating of the entity/instrument;
| Chapter III | 18-(d)
Probability of Default
(22) PACRA´s Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e, probability).
PACRA´s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be
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observed in the past | Chapter III | 14-(f-VII)
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